LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the U.K. large-caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at engineer Weir Group (WEIR -0.85%), whose main business is producing pumps and related equipment for the oil and mining industries.
Weir Group vs. FTSE 100
Let's start with a look at how Weir has performed against the FTSE 100 over the last 10 years:
|
Total Returns |
2008 |
2009 |
2010 |
2011 |
2012 |
10 yr trailing avg |
|---|---|---|---|---|---|---|
|
Weir Group |
-59.6% |
137.5% |
151.2% |
15.7% |
-5.9% |
29.9% |
|
FTSE 100 |
-28.3% |
27.3% |
12.6% |
-2.2% |
10% |
10% |
Source: Morningstar.
(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
The commodities supercycle helped Weir to deliver total returns of more than 100% in two years out of the last five -- a truly outstanding record, but one that will be hard, if not impossible, to maintain. So how does this engineering firm look as a long-term retirement holding?
What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Weir shapes up:
|
Item |
Value |
|---|---|
|
Year founded |
1871 |
|
Market cap |
£5.1bn |
|
Net debt |
£689m |
|
Dividend Yield |
1.6% |
|
5-year average financials |
|
|
Operating margin |
16.6% |
|
Interest cover |
25x |
|
EPS growth |
31.4% |
|
Dividend growth |
18.2% |
|
Dividend cover |
3.4x |
Here's how I've scored Weir Group on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
|
Longevity |
Weir's 142-year heritage is impressive. |
5/5 |
|
Performance vs. FTSE |
Exceptional. |
5/5 |
|
Financial strength |
Moderate debt and strong cash flows. |
4/5 |
|
EPS growth |
Good earnings growth |
4/5 |
|
Dividend growth |
Good growth but low yield. |
3/5 |
|
Total: 21/25 |
||
Between March 2007 and the end of 2012, Weir's operating profit margin rose from 11% to 18.5%, its annual revenues climbed by 150% and its share price by rose by 236%. Although the business has been a big beneficiary of the recent booms in mining and oil and gas production, the company's management deserves some credit, too, as they have fully exploited this once-in-a-generation opportunity.
As a result of its strong earnings growth, Weir's share price remains on a moderate price to earnings ratio (P/E) of 15.7, just below the FTSE 100 average of 16.7. This highlights the biggest weakness of this share, which is that it doesn't provide very much income. Although Weir has increased its dividend every year since at least 1993, its rapid growth and falling payout ratio has meant that its dividend yield has failed to grow, and is currently a below-average 1.6%. For me, this is simply too low for a retirement share, given that the FTSE 100 average yield is around 3.2%, which can be safely and cheaply accessed through an index tracker fund.
My verdict
Weir Group's score of 21/25 reflects its quality as a company, and it has performed very well during a boom period for its main customers. Weir also has an enviable record of dividend growth, and announced a double-digit dividend increase for the eighth consecutive year in 2012.
Despite this, at its current share price, Weir's low yield rules it out for me as a retirement share, because the dividend payout would have to double before its yield rose to match the FTSE 100 average of 3.2%. However, if Weir's share price were to fall substantially, it could become a very attractive buy.
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